Wednesday, April 10, 2013

The Whitehouse FY2014 budget appears to differ little from the GAO
unrealistic Baseline scenario in proposed spending as % of GDP that this site addressed here in its analysis of more realistic long term debt projections. The differences would likely not be very noticeable in the graphs (it is a tiny bit higher early on, a tiny bit lower at the end, likely to make the result slightly worse). The existing page analyzing long term spending based on the GAO
forecasts gives a useful picture of the financial mess the US may be
in.

Now that the public has become more worried about the deficit, one concern regarding budget proposals from both Congress and the White House is whether their proposals might only be truly concrete for the next year or so and not for the decade afterwards. It may be they are becoming more adept at rationalizing glowing figures for the future that will never actually appear . That is why the CBO and GAO do more realistic "current policy" scenarios and don't merely rely on the "baseline" figures. The Chief Actuary for Medicare has called the official Medicare spending projections unrealistic in the past (they are provided to match assumptions they are required to use about future medical prices), and this site has shown the long range Social Security Administration estimates seem unrealistic, and seem to have become more optimistic over time.

All the White House and Congressional budget documents are based on more optimistic estimates
of revenue as a % of GDP than is likely, and overoptimistic GDP
forecasts. It is
not clear that the cuts proposed by the GOP's House budget will ever
happen. They would reduce the deficit, but it wouldn't balance the
budget if their optimistic revenue projections aren't met. It is not clear without more research if those in the both parties in Congress are likely providing entirely too unrealistic "baseline" scenarios that are unlikely to
happen, or to what degree they truly would be making any sustainable policy shits in spending that would represent the core of
a new "current policy" scenario. In addition, it is not clear without more research if any of the budget proposals underfund anything over the next decade in a way that will lead budgets to balloon afterwards to make up for it.

This site may plug the Senate and House figures into a new analysis, time permitting (thought needs to be given to how they should be extended into future decades, among other issues like whether their spending categories match the GAO forecast used for this sites analysis). It would be useful to see their impact, but there are some other topics to get to first. A more realistic picture may not emerge until after the budget battles have gone further or until future CBO or GAO long range forecast updates (or better entitlement forecasts) try to resolve what if anything the proposals really imply for a "current policy" more realistic scenario (rather than just a "baseline") and for spending beyond the next decade.

If you want a task to be performed by government, it is important to consider what level of government it should be entrusted to.In most cases it isn't appropriate to assign a task to the federal government rather than local or state governments. It is less democratic to have the federal government handle issues. Special interests have too much influence over out of control federal finances because people fail to think through this issue. Details here

Tuesday, April 9, 2013

Those who haven't taken the time to read the new site page on why medical prices rise missed seeing this huge problem that hasn't gotten media attention:

Obamacare gave insurers reason to want medical prices to *increase*

The public was told insurers spent too much on overhead and profit so the government needed to ensure that most of their revenue went to paying medical claims. Obamacare requires insurers to
meet a "Medical Loss Ratio" (MLR) which compares their spending on
medical claims to the amount they receive in premiums. If they don't spend at least 80% of their premiums on medical claims in the small&individual markets and 85% in
the large group market they need to issue rebates to customers to meet
that standard. This provides incentive to restrict overhead&profit,
but it also provides incentive for many to increase, or at least NOT decrease medical costs.

Another way of looking at it is they need to spend at least 4 or 5.7 times as much on medical costs as they spend on overhead&profit, otherwise they are breaking the rules and will lose money by needing to give a rebate. They are able to increase profit if they increase medical spending and raise premiums. They can't reduce medical spending much or they'll be punished by needing to give customers a rebate. It is in their interest to applaud healthcare providers who raise prices, rather than trying to negotiate lower rates to gain customers through lower premiums and increase profit.

The Obamacare site brags there were "$1.1 billion in rebates" this year, which is around 0.1% of total premiums. That was in exchange for an approach which takes away incentive to control medical costs, i.e. "penny wise and pound foolish". Challenge those who support Obamacare to explain whether those who passed it either don't know much about business, or were trying to help healthcare prices rise. The new page detailing the problems in healthcare is long, but challenge Obamacare supporters to read it and see if they can justify Obamacare afterwards. The page includes some issues few if any healthcare pundits have mentioned.

The claimed concern over health insurance profits is doubtful since they are one of the least profitable parts of healthcare. In 2008 its profit ranked "35th out of 53 top industries" and by another measure "the profit margin for health insurance companies was [...] 87th out of 215 industries". A government report notes the "net cost of health insurance" (administration&profit) was the only part of the cost of premiums to decrease between 2005 and 2009.

Note: the new healthcare page has been polished/updated slightly since its release last week.See the page for details on how government limits competition and drives up prices.

"as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit"

Food is more critical to life than medical care.
You are guaranteed to die after not eating for a few weeks.
Yet most companies don't have "employer food plans" and there is no
outcry for "single payer food". Concern over ensuring the poor can eat
doesn't lead Americans to suggest the government grow food and run
grocery stores and restaurants. Those in poverty are helped to eat
through either private charity, government monetary assistance, or
vouchers for food (aka food stamps). The same methods used to ensure the
poor eat can be applied to healthcare. If the government is going to help it can provide vouchers for private insurance rather than using the issue as an excuse to benefit industry groups.

The former Soviet Union felt competition was wasteful. They felt
food was so important government had to produce it. Obviously it turned
out they were wrong and competition in a free market works far better. Healthcare policy in this country is more complicated than it needs to be since many don't apply that simple lesson. That complexity hides favors for special interests that benefit at your expense. See the new site page for details on how government limits competition and drives up prices.

Monday, April 1, 2013

A new site pageshows government data indicates within the next decade the federal government may be spending more on entitlement programs and interest than it receives in revenue. It couldn't spend money on anything else and balance the budget. Within the next 10-25 years (forecasts vary) simply the interest on the debt may be more than revenue. The budget couldn't be balanced even in theory which means the country would have effectively gone bankrupt before that.

Politicians didn't learn enough from the financial crisis. Many people lost houses when they couldn't afford rising mortgage costs. Often they overestimated their future earnings and underestimated expenses. Its understandable to dream about what could be done with a higher income, but its best to use conservative estimates when planning budgets. Federal agenciesaren't doing a good job of considering the possibility of lower income andhigher expenses. Last year the Federal Reserve published a study"How Good Are the Government’s Deficit and Debt Projections and Should We Care?" which looked at the track record of the Congressional Budget Office projections from the last few decades. They compared them with"random walk" (RW) projections, i.e. random guessing, and found that

"the CBO’s cumulative 5-year projections are considerably worse than projectionsfrom the RW model; [...]the deficit projections beyond ayear were unreliable. Importantly, we found that the projections were biased in the direction ofunderprojecting the size of the deficit or overprojecting the size of the surplus."

Since the CBO tends to be overoptimistic, it is useful to consider
more conservative projections combining other government data. People in
business often plan by exploring best, expected and worst case scenarios because they know the future is hard to accurately predict.The new page goes into detail and provides an interactive graph of future federal finances where assumptions can be changed.

Saturday, March 30, 2013

Anew site page is up, or here is an intro:In the US Treasury's annual "Financial Report of the U.S. Government" released in January 2013, theGovernment Accountability Office reports that the numbers for Social Security are so problematic it couldn't audit them to even render an opinion, saying: "In addition, GAOissued disclaimers of opinion on the 2012,2011, and 2010 Statements of SocialInsurance (SOSI)". They don't attempt to audit projections of future finances which are even more problematic, and may underestimateworst caste costs. Their claimed "high cost" scenario is high cost in nominal dollars, but if you adjust it for inflation it becomes the lowest cost scenario.

It is important to note the SSA has a history of not just being wrongon their expected demographic estimates (which is understandable for a long term forecast), but more importantly being overoptimistic about how much variation to consider for best/worst case scenarios. The 1950 annual SSA reportprojected US population in 2000 to be worst case 199 million, best case 173 million. In reality it turned out to be 282 million, 42% above their highest projection. Imagine if their real costs turn out to be 42% higher than their current projections.

The SSA claims to be able to forecast things like GDP yearly growth through 2090 more accurately than 2or 5 year forecasts have proven to be for the past few decades from the Congressional Budget Office, the Administration, the Federal Reserve and blue chip private consensus estimates.Their estimates indicate they think they can forecast future GDP even more accurately than GDP is measured. Their projections have questionable estimates, and exhibit overconfidence in the accuracy of those estimates.

Imagine by analogy someone were to document the most sophisticated weather forecast system existing today. They might provide lots of numbers, but if it gave a forecast for the weather 1 year from today and claimed it would be off at most by 1 degree we would still be wise to be rather skeptical without better evidence their methods were realistic. The US needs to plan for the possibility Social Security system could wind up in far worse shape than it admits since the estimates should be considered far less certain than it claims. For more details see this new site page

There are reasons to expectthe US economy to grow more slowly in the future than it has in the past. Itdoesn't seem to be growing at an exponential rate, which means its yearly % growth will go down over time.

Unfortunately government entities often perform estimates of future tax revenue, debt and spending ( e.g. of social security and medicare) based on unrealisticallyoptimistic hopes for how fast our economy will grow. Private retirement plans are often made assuming future percentage returns on investment will match past returns, which may not be the casefor those who invest only in the US.